JetBlue’s proposed merger with Spirit Airlines will, according to the company, bring lower fares to more travelers across the USA. In the press release announcing the deal and in the investor briefing CEO Robin Hayes repeatedly offered up quality sound bites emphasizing that potential. Most significantly, JetBlue believes that legacy airlines ignore the ULCCs such as Spirit and Frontier when they show up in a market, while “when JetBlue shows up in new markets fares come down across the board.”
When we look at what it takes to lower fares across the US, a larger JetBlue can do that.– JetBlue CEO Robin Hayes
There is, of course, some truth to that statement. JetBlue’s arrival in a new market typically sees fares charged by other carriers drop. Where JetBlue and Spirit overlap, however, it is inevitable that fares will rise. They have to in order for JetBlue to realize the net benefits it proposes. And that effect is likely to leak beyond just the directly competitive markets.
Costs will increase; fares will follow
Basic macroeconomics says that reduced competition allows for higher fares. And that would be the case with any merger in the US aviation industry. But the proposed JetBlue-Spirit deal comes with additional factors that will force higher fares.
Most notably, JetBlue plans to convert all the Spirit Airlines planes to a JetBlue configuration. Spirit today flies with 228 seats on its A321s and 174-182 on its A320s. JetBlue flies those planes with 200 and 150-162, respectively. Simply removing 10-15% of the seating capacity from Spirit’s operations will drive up unit costs. JetBlue CFO Ursula Hurley acknowledges this challenge. She notes that post-merger the airline hopes to maintain JetBlue’s existing cost levels, costs which are higher than Spirit’s.
And there is no way JetBlue can deliver profitable operations on fewer total seats flying without raising the prices on those seats. Too many fixed costs of the operation preclude that. It will have to operate the legacy Sprit fleet at fares higher than what Spirit charges today. Plus, with a lower fare competitor eliminated JetBlue likely can afford to raise fares beyond what it charges today.
Even if that also means legacy airlines lower some fares where they now compete against JetBlue rather than Spirit, the tens of millions of passengers each year who fly on Spirit today are almost certain to see higher fares.
Moreover, while the legacy carriers may not compete on fare with the ULCCs, JetBlue is more inclined to do so, especially with its Blue Basic fare family. If the competition against Spirit can be eliminated that creates an opportunity to push those fares higher as well.
After all, the company expects $600-700 million/year in overall benefits with the combined operation. That cannot be delivered only from operational and network synergies or more efficient economies of scale.
Squeezing the market
A notable share of Spirit’s market comes from travelers who fly because the fares are so low. This discretionary travel competes against driving or, more commonly, people choosing to simply not make a trip. As fares inch higher, that market feels a pinch, with some travelers ultimately choosing to not make the trip.
Hayes suggests “most people will welcome” the improved on-board experience offered by JetBlue, even at the basic fare. CFO Ursula Hurley offered a similar take, noting “Bringing the Spirit fleet to JetBlue spec is going to bring competitive fares with a heightened customer experience.” But when it comes to the most price-sensitive passengers, the free snacks or WiFi are not what compel the transaction.
The carrier expects that the missing revenue from those non-trips will be made up, of course. But it will come from other passengers paying a bit more than they previously did flying on Spirit.
The Spirit customer profile is, of course, more complex than just passengers seeking the lowest fares. As Hayes notes, “Spirit has a lot of price-sensitive customers today, but plenty who fly it because it is the most convenient.” And those are the customers JetBlue expects will stick around, whether buying Blue Basic fares or one of the more full-featured options. But the company absolutely expects that more of them will pay more than they do today.
A silver lining
Less dense planes could bring about one small benefit to the market. The current white-hot growth pace in the US market will see hundreds of planes and tens of thousands of seats added by the end of the decade.
Just how well all those seats will be filled remains an open question. And slowing the frenetic growth could help keep the market stable as it expands. But that’s no guarantee.
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